Question

The Statement of Cash Flows is often referred to as the "bridge" between the Income Statement and Balance Sheet. For your initial post discuss whether or not you think this is an appropriate description or not, and why. In your response post(s) pick one of the three sections of the Statement of Cash Flows and explain how (and why) we can use two accrual based financial statements to produce a cash based statement.

Answer 1

When we prepare a Statement of Cash Flow under the direct method, we refer two statements i.e., the Income Statement and the Balance Sheet. The balance sheet of the last two years are used to get the opening and closing ledger balance of the current year. The income statement is used to get the expenses or income incurred during the current year. So basically we used these two statement to converted the expense and income incurred from accrual basis to cash basis.

For example, if there is a tax liability then the opening and closing balance of tax payable will appear in the balance sheet. The difference between these two amount should be the tax expense incurred during the year and must match with the tax expense charged on the income statement. If there is a mismatch then the difference is the amount of tax paid. The paid amount represents the cash flow from operating activities on the Statement of Cash Flow.